Economic Growth Engine Sputters

Will the economy slip into recession next year? No one can say for sure, but according to the latest ChangeWave survey, the once-vibrant U.S. economy has slowed to an anemic pace.

The survey of 3,890 ChangeWave Alliance members – conducted November 26 - December 4, 2007 – finds that along with a reduction in 4th Quarter corporate sales growth there is also a flattening of capital spending and reduced visibility going forward.

Tellingly, only 28% of respondents project their company sales will come in Above Plan for the 4th Quarter. That’s 2-percentage points less than in the previous survey. Another 25% report their sales will come in Below Plan, 1-pt worse than previously.

As the following chart shows, the overall sales growth rate is down for the second-consecutive quarter. This represents the slowest growth rate recorded in a ChangeWave corporate quarterly survey since September 2004.

Although the above results do show a slowdown, it’s helpful to put these findings in context. If we compare the current numbers with our corporate sales results during the last period of recession in 2001, it’s clear that we’re not yet witnessing anything like the downtrends we picked up then.

Note that an actual recession was taking place between March and November 2001.

As can be seen from the chart, the slowdown back then was far more pronounced. Still, the current findings do indeed contain bearish signals that we’ll continue to watch closely along several fronts.

Here are key areas we’re keeping close tabs on:

No Growth Capital Spending: In a highly worrisome finding, for the first time in four years we see no growth in capital spending going forward. That is, more respondents now project a decrease in their company’s overall capital budget for the 1st Quarter (18%) than an increase (17%). Even more troubling is this comes at a time of year when we normally find a strong seasonal uptick in the capital spending growth rate.

Case in point – there is a striking difference between the current December survey findings and the December results from previous years in the chart below:

1Q Sales Pipeline Projections: The survey also shows reduced visibility going forward. The sales pipeline projections for 1st Quarter 2008 show 26% of respondents saying their company will come in Above Plan – 6-pts less than previously. At the same time, 16% report they’ll come in Below Plan – 1-pt worse than previously.

Other Key Findings:

• Green Light Spending. Looking ahead, we asked respondents to rate the current willingness of their existing customers to spend money on their company’s products and services. Just over half (54%) report that their existing customers have a Green Light to spend (i.e., “spending is normal”) – 5-pts less than previously and the lowest level recorded since September 2004.

• Labor Market Tightening? In another bearish sign, only 20% say there are More new hires in their company at this point in the fourth quarter vs. last quarter – a 4-pt decline since the previous survey. Another 19% say there are Less new hires – up 3-pts.

• Effects of the Credit Crunch. In another striking sign of the impact the credit crunch is having on the economy, 14% of respondents report it is harder for their company to borrow money than it was just 90 days ago. This compares to only 1% who say it is easier to borrow. As seen in the following table, this trend is disproportionately impacting smaller companies.

Would you say it is now harder for your company to borrow money than it was 90 days ago, easier to borrow money, or has there been no change in your company’s ability to borrow money?

Bottom Line: The current survey shows the economy is still growing, albeit at a very anemic pace. Along with a further reduction in corporate sales growth for the fourth quarter, the findings shows flat capital spending growth, reduced visibility and a tighter labor market.

While there is little upside to these results, the findings do not yet signal a recession. But they clearly show the economic growth engine sputtering.

Jim Woods co-wrote this article.

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This article summarizes the results of a recent ChangeWave Alliance survey. The Alliance is a research network of 13,000 business, technology and medical professionals who spend their everyday lives working on the front line of technological change. For more info on the ChangeWave Alliance, or if you are interested in joining, please click here.